Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectations of earnings, revenues, gross margins, non-operating expense, tax rates, net income, inventory turnover rates or other financial items, as well as backlog, order levels and activity of our company as a whole or our particular markets; any statements of the plans, strategies and objectives of management for future operations, restructuring and outsourcing initiatives; factors that may affect our 2009 operating results; any statements concerning proposed new products, services, developments, changes to our restructuring reserves, our competitive position, hiring levels, sales and bookings or anticipated performance of products or services; any statements related to future capital expenditures; any statements related to the needs or expected growth of our target markets; any statement related to our ability to recognize value from the auction rate securities we hold; any statements relating to the credit worthiness of our derivative counterparties; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing; and statements made under the heading "Outlook for the Remainder of 2009." You can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "appear" and other words and terms of similar meaning. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed here and the risks discussed from time to time in our other public filings. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the date of this report, and we assume no obligation to update these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC. You also should read Item 1A. "Risk Factors" included in Part II of this report for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors also could adversely affect us.

Summary of Products and Segments

We are a leading supplier of instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications. We report our revenue based on a market-focused organization: the Electronics market, the Research and Industry market, the Life Sciences market and the Service and Components market.

Our products include focused ion beam systems, or FIBs; scanning electron microscopes, or SEMs; transmission electron microscopes, or TEMs; and DualBeam systems, which combine a FIB and SEM on a single platform.

Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor and data storage manufacturers ("wafer-level DualBeam systems") and models that have small stages and are sold to customers in several markets ("small-stage DualBeam systems").

The Electronics market consists of customers in the semiconductor, data storage and related industries such as printers and microelectromechanical systems ("MEMs"). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 65 nanometers and smaller, the use of multiple layers of new materials such as copper and low-k dielectrics and increasing device complexity. Our products are used primarily in laboratories to speed new product development and increase yields by enabling 3D wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures. In the data storage market, our products offer 3D metrology for thin film head processing and root cause failure analysis. Factors affecting our business include the transition from longitudinal to perpendicular recording heads, rapidly increasing storage densities that require smaller

recording heads, thinner geometries and materials that increase the complexity of device structures.

The Research and Industry market includes universities, public and private research laboratories and customers in a wide range of industries, including automobiles, aerospace, forensics, metals, mining and petrochemicals. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale. Our solutions provide researchers and manufacturers with atomic-level resolution images and permit development, analysis and production of advanced products. Our products are also used in root cause failure analysis and quality control applications.

The Life Sciences market includes universities and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. Our products' ultra-high resolution imaging allows cell biologists and drug researchers to create detailed 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.

Overview

Net sales decreased to $141.8 million in the first quarter of 2009 compared to $151.7 million in the fourth quarter of 2008 and $151.6 million in the first quarter of 2008. Net sales decreased $1.0 million and $7.2 million, respectively, compared to the fourth quarter of 2008 and the first quarter of 2008 as a result of the strengthening of the U.S. dollar against foreign currencies, primarily the euro. Declines in the first quarter of 2009 compared to the fourth quarter of 2008 also resulted from lower sales in each of our market segments as the global economy continued to struggle.

At April 5, 2009, our total backlog was $319.3 million, compared to $330.5 million at December 31, 2008. At April 5, 2009, our backlog consisted of product and service and components unfilled orders of $256.8 million and $62.5 million, respectively, compared to $273.5 million and $57.0 million, respectively, at December 31, 2008. Orders received in a particular period that cannot be built and shipped to the customer in that period represent backlog. We only recognize backlog for purchase commitments for which the terms of the sale have been agreed upon, including price, configuration, options and payment terms. Product backlog consists of all open orders meeting these criteria. Service and Components backlog consists of open orders for service, unearned revenue on service contracts and open orders for spare parts. U.S. government backlog is limited to contracted amounts. In addition, some of the U.S. government backlog represents uncommitted funds.

Of our total backlog at April 5, 2009, approximately 90% is expected to be shippable within 12 months and approximately 10% requires some incremental development. Customers may cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. Historically, cancellations have been minor. However, the global markets are in a period of extraordinary financial uncertainty and historic cancellation rates may increase in the future. During 2008, we experienced cancellations of $7.6 million. From time to time, we have experienced difficulty in shipping our product from backlog due to single-sourcing issues and problems in securing electronic components from a certain vendor. In addition, product shipments have been delayed due to delays in completing certain application development, by our customers pushing out shipments because their facilities are not ready to install our systems and by our own manufacturing delays due to the technical complexity of our products and supply chain issues. A significant portion of our backlog is denominated in currencies other than the U.S. dollar and, therefore, our reported backlog fluctuates, to an extent, as a result of foreign currency exchange rate fluctuations. For these reasons, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.

Outlook for the Remainder of 2009

The ongoing difficult global economic environment, including unprecedented volatility in foreign exchange markets, makes forecasting for the remainder of 2009 particularly challenging. We continue to expect a decline in total revenue for full fiscal year 2009 compared too full fiscal year 2008, as a decline in Electronics revenue is not likely to be offset by growth in our other markets.

Our backlog of unfilled orders remains at near-record levels, and, historically we have not experienced significant volumes of order cancellations. As a result of the backlog and our near-term outlook for new bookings, we expect revenues in the second quarter of 2009 to likely be flat to slightly down from the first quarter of 2009. For the second half of 2009, there is potential for normal seasonal patterns in revenue, and we may also experience some increase in bookings and revenue as a result of economic stimulus programs being implemented in the U.S. and worldwide.

A larger percentage of our expenses are denominated in euros or Czech koruna (which tends to move generally in line with the euro on foreign exchange markets) than in euro- and koruna-denominated revenue. As a result, when the U.S. dollar strengthens in foreign exchange markets, our reported revenue declines or grows more slowly, while our expenses decline even more rapidly, improving operating income. Conversely, if the euro and the koruna strengthen against the U.S. dollar, revenue increases and expenses increase more rapidly, reducing operating income. We are taking steps to create more naturally hedged positions, but, for the remainder 2009, the impact of currency movements is expected to generally be as described above.

Historically, our Research and Industry business has generally remained stable in economic downturns, resulting in flat revenue or even modest growth, as governments, institutions and corporations globally invest in research and product development. While the current economic downturn may limit the R&D and capital spending budgets of some corporations and government entities, the long lead-times of many of our customers' projects and the potential positive impact of government economic stimulus spending will likely provide offsetting growth opportunities.

Presently, we expect continued growth in our Life Sciences business in 2009, although it will vary from quarter to quarter. This is an emerging, research-oriented market for us, and we expect our revenue to continue to be positively affected by increased penetration of electron microscopy into this market.

The Electronics segment, which includes semiconductor and data storage customers, is in the midst of a severe industry-wide downturn. Revenue for this segment declined in the first quarter and is expected to remain at fairly low levels for the remainder of 2009, although there could be significant variation from quarter to quarter. Despite the difficult environment, we believe that we have the potential to demonstrate better performance than the semiconductor capital equipment industry as a whole, because of increased demand for our higher-resolution images as manufacturers move to smaller line widths and new processes, among other factors.

Demand for service of our products is expected to remain approximately flat as growth in our installed base of products is offset by some customers' decisions to reduce or not renew service contracts due to the current economic environment.

We believe we hold leadership positions, both technologically and competitively in the markets in which we compete. We plan to maintain that leadership, even as competitors introduce new products that attempt to match our earlier advances.

Our gross margins improved in the first quarter of 2009 compared to the same period of 2008, and our goal is to maintain and improve on those levels for the remainder of 2009. Factors that are expected to affect gross margins are product mix, relative foreign currency rates and the beneficial impact of the restructuring program begun in 2008. That includes lower costs from our suppliers, new outsourcing initiatives, more natural currency exposures, headcount reductions and improved systems.

Operating expenses are expected to remain generally flat compared with the first quarter of 2009 for the remainder of fiscal year 2009 compared with the first quarter of 2009. We plan to continue to limit discretionary spending and hiring in light of the overall revenue outlook.

Non-operating expense is expected to increase in the second quarter 2009 due to significantly lower market interest rates and expected losses on ineffective cash flow hedges. While net interest income will remain negative in the latter half of the year, foreign exchange losses are expected to decrease in the second half of the year compared with the first half.

Our tax rate is expected to return to approximately 25% to 28% for the remaining quarters of 2009 from the unusually low level in the first quarter of 2009.

Critical Accounting Policies and the Use of Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Management's Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. During the first quarter of 2009, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 20, 2009.

Results of Operations

The following table sets forth our statement of operations data, both in
absolute dollars and as a percentage of net sales (dollars in thousands).



                                               Thirteen Weeks Ended(1)           Thirteen Weeks Ended(1)(2)
                                                    April 5, 2009                      March 30, 2008
Net sales                                   $      141,833          100.0 %   $        151,646           100.0 %
Cost of sales                                       83,141           58.6               92,421            60.9

Gross profit                                        58,692           41.4               59,225            39.1
Research and development                            16,780           11.8               17,807            11.7
Selling, general and administrative                 32,826           23.1               32,612            21.5
Restructuring, reorganization, relocation
and severance costs                                    962            0.7                   -               -

Operating income                                     8,124            5.7                8,806             5.8
Other income (expense), net                           (320 )         (0.2 )             (1,220 )          (0.8 )

Income before income taxes                           7,804            5.5                7,586             5.0
Income tax expense                                   1,466            1.0                2,553             1.7

Net income                                  $        6,338            4.5 %   $          5,033             3.3 %

(1) Percentages may not add due to rounding.

(2) Restated for the effects of the adoption of FSP No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." See Note 18 of the Condensed Notes to the Consolidated Financial Statements.

Net Sales

Net sales decreased $9.8 million, or 6.5%, to $141.8 million in the thirteen weeks ended April 5, 2009 (the first quarter of 2009) compared to $151.6 million in the thirteen weeks ended March 30, 2008 (the first quarter of 2008). This decrease reflects decreases in Electronics, Research and Industry and Service and Components, partially offset by an increase in Life Sciences as described more fully below.

Exchange rate fluctuations decreased net sales by approximately $7.2 million during the first quarter of 2009 as approximately 34.5% of our net sales were denominated in foreign currencies that declined in

strength against the U.S. dollar during the period. A significant portion of our revenue is denominated in foreign currencies, especially the euro. As the U.S. dollar strengthens against the euro, this generally has the effect of reducing net sales and backlog.

Net Sales by Segment

Net sales by market segment (in thousands) and as a percentage of net sales were
as follows:



                                               Thirteen Weeks Ended
                                        April 5, 2009        March 30, 2008
             Electronics              $  29,359    20.7 %   $  46,521    30.7 %
             Research and Industry       58,338    41.1 %      61,097    40.3 %
             Life Sciences               20,865    14.7 %       9,596     6.3 %
             Service and Components      33,271    23.5 %      34,432    22.7 %

                                      $ 141,833   100.0 %   $ 151,646   100.0 %

Electronics

The $17.2 million, or 36.9%, decrease in Electronics sales in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to the continuing cyclical downturn in the semiconductor industry, which has negatively affected semiconductor related capital expenditures. In addition currency fluctuations decreased Electronics net sales by $0.7 million in the first quarter of 2009 compared to the first quarter of 2008.

Research and Industry

The $2.8 million, or 4.5%, decrease in Research and Industry sales in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to a $3.7 million decrease related to currency fluctuations.

Life Sciences

The $11.3 million, or 117.4%, increase in Life Sciences sales in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to the sale of more high-end TEMs as we grow our customer base and our tools gain greater acceptance in this segment, partially offset by a $1.5 million decrease related to currency fluctuations.

Service and Components

The $1.2 million, or 3.4%, decrease in Service and Component sales in the first quarter of 2009 compared to the first quarter of 2008 was due primarily to a $1.3 million decrease related to currency fluctuations and decreased sales of our components as a result of industry-wide reductions in semiconductor capital equipment spending. These factors were partially offset by an increase in service due to a larger install base.

Net Sales by Geographic Region

A significant portion of our net sales has been derived from customers outside
of the U.S., which we expect to continue. The following table shows our net
sales by geographic location (dollars in thousands):



                                                      Thirteen Weeks Ended
                                               April 5, 2009        March 30, 2008
     U.S. and Canada                         $  55,482    39.1 %   $  54,183    35.7 %
     Europe                                     48,924    34.5 %      39,797    26.3 %
     Asia-Pacific Region and Rest of World      37,427    26.4 %      57,666    38.0 %

                                             $ 141,833   100.0 %   $ 151,646   100.0 %

U.S. and Canada

The $1.3 million, or 2.4%, increase in sales to the U.S. and Canada in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to increased Life Sciences and Research and Industry sales, partially offset by lower Electronics sales.

Europe

Europe also includes Central America, South America, Africa (excluding South Africa), the middle east, eastern Europe and Russia. The $9.1 million, or 22.9%, increase in sales to Europe in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to a large sale to a middle eastern university customer.

Asia-Pacific Region and Rest of World

The $20.2 million, or 35.1%, decrease in sales to the Asia-Pacific region and the rest of the world in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to decreased sales from our Electronics segment as semiconductor capital spending has declined.

Cost of Sales and Gross Margin

Our gross margin (gross profit as a percentage of net sales) by segment was as
follows:



                                            Thirteen Weeks Ended
                                           April 5,      March 30,
                                             2009          2008
                  Electronics                   49.8 %        43.5 %
                  Research and Industry         45.3 %        43.9 %
                  Life Sciences                 36.6 %        33.0 %
                  Service and Components        30.1 %        26.1 %
                  Overall                       41.4 %        39.1 %

Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead, as well as all of the costs of our customer service function such as labor, materials, travel and overhead. We see five primary drivers affecting gross margin: product mix (including the effect of price competition), volume, cost reduction efforts, competitive pricing pressure and currency fluctuations.

Cost of sales decreased $9.3 million, or 10.0%, to $83.1 million in the first quarter of 2009 compared to $92.4 million in the first quarter of 2008, primarily due to a $10.9 million decrease related to currency fluctuations and lower sales, partially offset by an increase in costs due to increased sales of our higher-end TEM products.

The net effect on our gross margin from the change in currency exchange rates during the first quarter of 2009 on our net sales and cost of sales was an approximately $3.7 million increase, or a 2.6 percentage point increase. Offsetting the currency effects were approximately $0.3 million of cash flow hedge losses recorded in cost of sales.

Electronics

The increase in Electronics gross margin in the first quarter of 2009 compared to the first quarter of 2008 was due primarily to significant pricing pressure on certain transactions in the first quarter of 2008. The gross margin achieved in the first quarter of 2009 is more in line with our historical gross margin levels.

Research and Industry

The increase in Research and Industry gross margin in the first quarter of the 2009 compared to the first quarter of 2008 was primarily due to favorable currency fluctuations and a shift in product mix to more higher-end TEM sales.

Life Sciences

The increase in Life Sciences gross margin in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to favorable currency fluctuations, a shift to more higher-end TEMs during the first quarter of 2009 and pricing pressures on our low-end TEMs in the first quarter of 2008.

Service and Components

The increase in the Service and Components gross margin in the first quarter of 2009 compared to the

first quarter of 2008 was primarily due to improvement in part usage and lower repair and distribution costs.

Research and Development Costs

Research and development ("R&D") costs include labor, materials, overhead and payments to third parties for research and development of new products and new software or enhancements to existing products and software. These costs are presented net of subsidies received for such efforts. During the 2009 and 2008 periods, we received subsidies from European governments for technology developments specifically in the areas of semiconductor and life science equipment.

R&D costs decreased $1.0 million to $16.8 million (11.8% of net sales) in the first quarter of 2009 compared to $17.8 million (11.7% of net sales) in the first quarter of 2008.

R&D costs are reported net of subsidies and were as follows (in thousands):

                                         Thirteen Weeks Ended
                                      April 5,         March 30,
                                        2009             2008
                    Gross spending   $    17,953      $    18,579
                    Less subsidies        (1,173 )           (772 )

                    Net expense      $    16,780      $    17,807

The decrease in R&D costs was primarily due to a $1.0 million decrease related to lower labor and related costs as a result of favorable currency movements.

We anticipate that we will continue to invest in R&D at a similar percentage of revenue for the foreseeable future. Accordingly, as revenues increase, we currently anticipate that R&D expenditures also will increase. Actual future spending, however, will depend on market conditions.

Selling, General and Administrative Costs

Selling, general and administrative ("SG&A") costs include labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions. SG&A costs also include sales commissions paid to our employees as well as to our agents.

SG&A costs increased $0.2 million to $32.8 million (23.1% of net sales) in the first quarter of 2009 compared to $32.6 million (21.5% of net sales) in the first quarter of 2008.

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